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Ahead of Wall Street

Friday, March 1, 2013

Market sentiment ahead of the open was weakened by data out of China and Europe, but the final arbiter of today’s market action will be developments on the home front. The sequester issue has turned out to be a non event, with investors essentially shrugging the onset of budget cuts today as nothing more than Washington noise. The day’s packed economic calendar will determine whether stocks will be able to make another go at fresh all-time highs or start losing ground, as was the case in the closing session on Thursday.
 
The January Personal Income & Outlays reading came in as expected this morning, though the income side of the equation came in weaker than expected. The report nevertheless indicates that consumer spending got underway at a good enough pace in the first quarter despite the fiscal drag. Incomes were down more than expected, reflecting the accelerated dividend and bonus payouts in December in the run up the Fiscal Cliff deadline.

We will have to see how the income numbers play out in the coming months, though anecdotal evidence from retailers like Wal-Mart (WMT - Analyst Report), Target (TGT - Analyst Report) and others indicate that the payroll tax hike has been having a negative impact on household purchasing power. We didn’t see that much evidence of that on the spending side this month, but it’s worth keeping an eye on.
 
The key domestic economic report today is the February manufacturing ISM report, which comes out a little later. The expectation is that this key measure of factory sector activity levels modestly pulled back from the prior month’s level, though it remained in expansionary territory. The other key data point is the University of Michigan’s final Consumer Sentiment survey reading for February, which is expected to be essentially unchanged from the preliminary February reading of 76.3 and January’s 73.8.

Today’s weaker than expected China purchasing managers index (PMI) is problematic as it potentially indicates that the still-born rebound could be losing momentum. The trend was evident from both the official and private-sector measures of China PMI. The official PMI reading came in at 50.1 below the 50.5 expected and the 50.4 level in January.

The private sector reading determined by HSBC Bank came in at 50.4 for February from January’s 52.3 level. Some analysts are assigning the blame for the February slowdown on seasonal factors (issues related to Lunar year) and expect the overall improving momentum to be in place. Importantly, the data is showing the country’s factory sector still in expansionary territory.
 
Sheraz Mian
Director of Research

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